Case Study: Business & Corporations Law - Contract and Liability

This case study delves into two distinct legal scenarios involving company and partnership liability. The first scenario examines pre- and post-registration contracts of WA Gold Exploration Ltd, focusing on the liability of promoter Steve Jones concerning contracts with Thor Mining Machinery Ltd and Volvo Trucks (Australia) Ltd. It applies Section 131 of the Corporations Act 2001 (Cth) and the principle of separate legal entity established in Lee v Lee’s Air Farming Ltd. The second scenario assesses the legality of transactions made by Simon, a partner in 'Computer Solutions,' specifically the purchase of a hard drive and a ute, analyzing the extent to which other partners are bound by these actions, referring to Section 5(1) and Section 24 (2) of Partnership Act 1892 No 12 and Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103 to determine liability based on express and ostensible authority.

Running Head: BUSINESS AND CORPORATION LAW 0
Business & Corporations Law
09-09-2018
Student’s Name

Business and Corporations Law Assignment
1
Contents
Question 1........................................................................................................................................2
Issue 2
Law 2
Application 3
Conclusion.......................................................................................................................................5
Question 2........................................................................................................................................6
Issue 6
Law 6
Application 7
Conclusion 8
References........................................................................................................................................9

Business and Corporations Law Assignment
2
Question 1
Issue
Can Thor Mining Machinery Ltd and Volvo Trucks (Australia) Ltd sue Steve to breach
the contract and whether Steve is liable for the same?
Law
It was held in the case of Lee v Lee’s Air Farming Ltd (1961) AC 12 that a company is a
separate legal entity from it is directors and employees. Directors are not liable for any act or
deed of the company. Being a separate legal entity, a company do the business transaction in it is
own name (cliffsnotes, 2018). A person who deals with the company has a belief that they are
doing business with the company and not worth the officers or directors of the company. In
addition to being a separate legal entity, a company is also an artificial person (Shepherd &
Ridley, 2015).
People who put their efforts incorporation of a company and bring the same into
existence are known as Promoter of the company. Before registration, a company does not get it
is individual legal identity, and therefore cannot be held liable for anything. In order to make a
company registered, promoters of the company enter into many contracts on behalf of the
company. These contacts are termed as Pre-registration contracts (Latimer, 2011) Under
Corporations Act 2001 (Cth) (hereinafter stated as an act), methods are mentioned in which
company can deal with the pre-registration contracts. The same is mentioned hereunder
Pre-Registration Contracts:-

Business and Corporations Law Assignment
3
In general, promoters, directors, and officers of the company act on behalf of the
company as an agent and company held liable for such actions. However, before the registration,
a company cannot act as a principle and therefore the same cannot be held liable for the deeds or
contracts of such people. Section 131 of the act is a section, which covers the provisions related
to pre-registration contracts. Subsection 1 of this section states that a company can ratify the pre-
registration contract, within the specified time mentioned in the contract or within a reasonable
time (Australian Government, 2018). If the company does not ratify the contract within the
specified or reasonable time then such contracts will not be bind on the company.
Section 131 (2) says that when a promoter enters into a pre-registration contract and
company do not get registered or the same get registered but not ratified such contract, then the
promoter will be held personally liable towards the third party in respect to the performance of
the contract (Australian Contract Law, 2018). This can be stated that for a pre-registration
contract, a company will be held liable only in those cases where the same ratified such contracts
within the mentioned or reasonable time.
Post Registration Contract: -
These are the contracts that a company enters into by it is own name. As mentioned
earlier that after registration, the company gets a separate legal entity, therefore the same will be
the only responsible person in respect to such post registration contracts (Knowles, 2012) Neither
a promoter, director nor any of the officers of a company will be held liable for a pre-registration
contract.
Application

Business and Corporations Law Assignment
4
In the provided case, two of the contracts are there. Both of these two contracts are
defined as follows:-
Thor Mining Machinery Ltd
Steve Jones, one of the promoters of the company named WA Gold Exploration Ltd has
made a contract with Thor Mining Machinery Ltd on behalf of his company. WA Gold
Exploration Ltd (the company) has registered as on 10th July. Steve has entered into a contract
with Thor Mining Machinery Ltd as on 06th July, therefore it was a pre-registration contract. The
contract was related to purchasing a drill machine worth $ 125000, payment of which was going
to be due as on 30th July. After incorporation of the company, the same has established an
advisory committee.
This committee has recommended to the board that the company should buy a drill
machine from another seller named United Mining Machinery Ltd which is selling the same for
only $ 100 000 instead of Thor Mining Machinery Ltd. On 25 day of July, the board of directors
of the company has accepted these recommendations of the committee. Applying the provisions
of section 131 (1) of the act, the company could ratify this agreement before 30th July but the
same has not made such ratification. As per the provisions of section 131 (2) of the act, Steve,
being the promoter of the company would be personally liable for performance of the contract
developed with Thor Mining Machinery Ltd.
Volvo Trucks (Australia) Ltd
This is another contract involved in the case. The company was registered as on 10th July.
Afterward, on 14th July, the board of directors of the company has signed a contract with Volvo
Trucks (Australia) Ltd to purchase 5 ore trucks. In consideration of these trucks, the company

Business and Corporations Law Assignment
5
was required to pay $ 500000. This transaction was meant to be complete on 30th September.
However, before the due date, an advisory committee of the company has reviewed the financial
condition of the company and found that there are not enough assets in the account of the
company. The company has not remained in the condition to make the payment to Volvo Trucks
(Australia) Ltd, therefore contract of the company with Volvo Trucks (Australia) Ltd. this was
purely a post-registration contract that the company has made with it is own name. Applying the
provisions of Lee v Lee’s Air Farming Ltd, company is a separate legal entity here and therefore
no one else can be held liable for it is conduct in an ordinary course.
Conclusion
Thor Mining Machinery Ltd
Steve will be held personally liable because the contract he has made was a pre-
registration contract and the company has not ratified the same.
Volvo Trucks (Australia) Ltd
Steve will not be held liable because it was a post-registration contract and only the
company is liable for the same.
Question 2
Issue
To check the legality of two of the transaction that Simon, one of the partners of the
firm has entered into with third parties on behalf of the firm. Whether other partners of the firm
are bind with these contracts.

Business and Corporations Law Assignment
6
Law
The partnership is a business form where two or more people come together for making
earring for them. The partnership agreement is a document that defines the authorities and
responsibilities of partners. Two kinds of authorities are there that are available with partners of a
partnership firm. One is express and another one is ostensible. Expressed authority can be written
and can be oral too. Whereas on another side ostensible authority is the one which is not
expressly granted to a partner but being the partners, it is assumed that such a person has this
kind of authority. A partnership firm is not a separate legal entity similar to a company and
therefore a firm and other partners are liable for the conduct of a partner. Section 5(1) of
Partnership Act 1892 No 12 (the act) describes the relationship for a partner with a third
party/outsider. Subsection 1 of this section says that a partners act as an agent of the firm and
therefore firm, being the principal is liable for such deeds of a partner. However, this section
further ads that the firm and another partner will be held liable only in those cases where the act
of a partner is related to the purpose of a business (New South Wales Government, 2018).
This section further says that even when a partner act outside of the expressed authority
but act in the ordinary course of business of partnership firm, the third party can held the firm
and other partners liable for the same. The reason behind this section is to provide a safeguard to
the innocent party (third party). A partnership is a closely held business and a third party cannot
know about the internal settlement of partners in respect to authority distribution. Nevertheless,
the section will not be applicable where a third party is or can be aware of such no authority of
partners. In the case of Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103, a partner pursued
an act which was under restriction category according to the partnership agreement, yet other

Business and Corporations Law Assignment
7
partner and firm held responsible by the court because the act was related to the ordinary
business of the firm.
Section 7 is also an important section, which says that if a partner does any act outside of
the nature of the business, then other partners and firm will only become liable where special
authority is given to the partner (Jade, 2018). According to the Section 24 (2) of the act, partners
can get the reimbursement of the expenses that they do on behalf of the firm but such expenses
must be related to the ordinary business of the firm (Austlii, 2018).
Application
In the given case, partners of the firm were involved in the business of providing data storage
services to the customers. Being the partners of the firm named “computer solutions” they have
made certain arrangements among them according to which none of the partners could make a
contract worth more than $ 10000. In addition to this, they have decided that if a partner would
enter into any transaction value of more than $ 10000 then the consent of all the partners would
be required. Simon, one of the partners of the firm has entered into two transactions on behalf of
the firm that is prescribed below-
1. Purchase of hard drive: - Simon has purchased hard drive for the firm that was of $ 15000
from Sunstar Computer Hardware Ltd. He did not take any approval from other partners.
As all the partners have decided that they will not enter into any transaction of more than
$ 10000, Simon should have taken approval of all other partners. Although purchasing of
the hard drive is related to the business of the firm as the same is a necessity of data
storage. Applying the provisions of a case of Mercantile Credit Ltd v Garrod and

Business and Corporations Law Assignment
8
provisions of section 5(1) of the act, other partners and firm will be held responsible for
the purchase transaction of the hard drive. In this case, the third party i.e. Sunstar
Computer Hardware Ltd could not be aware of the limited authority of Simon.
2. Purchase of Ute:- The other transaction that Simon has done on behalf of the firm was a
purchase of a ute from You Beaut Ute Ltd. This transaction is not related to the business
of the firm. Although the value of ute was just $ 10000, yet in the absence of any
specifically expressed authority, the firm and other partners cannot be held liable for the
transaction. The seller of Ute had reason to believe that Simon is not acting according to
the required authority.
Conclusion
Liability in both the transaction is different and resulted as follow-
1. In the purchase transaction of the hard drive, firm and other partners will be held liable.
2. In the purchase transaction of Ute, Simon will be held personally liable and this
transaction will not bind to the firm or other partners of the firm

Business and Corporations Law Assignment
9
References
Austlii. (2018). Partnership Act 1892 - SECT 24 Rules as to the interests and duty of partners other
than partners in incorporated limited partnership subject to special agreement. Retrieved
from: http://www6.austlii.edu.au/cgi-bin/viewdoc/au/legis/nsw/consol_act/pa1892154/
s24.html
Australian Government, (2018). Corporations Act 2001. Retrieved
from:https://www.legislation.gov.au/Details/C2018C00275
Austrlian Contract Law. (2018). Corporations Act 2001 (Cth). Retrieved from:
https://www.australiancontractlaw.com/legislation/cthcorporations.html
Cliffsnotes. (2018). Characteristics of a Corporation. Retrieved from:
https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/
corporations/characteristics-of-a-corporation
Corporations Act 2001 (Cth)
Jade. (2018). Partnership Act 1892 (NSW). Retrieved from: https://jade.io/article/276604
Knowles, J., R. (2012). 200 Contractual Problems and their Solutions (3rd ed.) Somerset:John
Wiley & Sons.
Latimer, P. (2011). Australian Business Law 2012. Australia: CCH Australia Limited.
Lee v Lee’s Air Farming Ltd (1961) AC 12
Mercantile Credit Ltd v Garrod [1962] 3 All ER 1103

Business and Corporations Law Assignment
10
New South Wales Government. (2018). Partnership Act 1892 No 12.
Retrieved from: https://www.legislation.nsw.gov.au/#/view/act/1892/12/historical2004-04-05/
full
Partnership Act 1892 No 12
Shepherd, C., & Ridley, A. (2015). Company Law. Oxon: Routledge.